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How cheap is 500 for the S&P 500 (price/earnings)?
- Thread starter clambill
- Start date
Quote from clambill:
I'm wondering if anyone who follows the fundamentals can comment on how cheap we will be if we hit 500. The last decline we had lasted two years and this recession is worst than the last one. So, I'm wondering how cheap 500 would be.
Cheap compared to what?
What metrics are you looking to use for your comparison?
About 2 months ago the "top down" estimate for the S&P 500 earnings for 2009 was at $42.24
I would suggest that we are now heading for a number that is closer to $30 than $40, and that would be similar to 2001.
But you have to be careful with comparisons to 2001 given all of the write-downs that have occurred in the financial sector. The Financial sector now makes up only 11.6% of the S&P 500, after peaking at 22.3% in 2006. We are almost back to the levels of 1992-1994 ( 10.6%). - - - In 2001, the financials were still up at 17.8%
http://bespokeinvest.typepad.com/bespoke/2009/01/sector-weightings-of-the-sp-500.html
http://66.218.69.11/search/cache?ei...+estimates+2009&d=HpBwC52uSWIL&icp=1&.intl=us
*Note: The above link shows "bottom-up" estimates ( excluding write-downs) , as opposed to the "top-down" estimates that I present in the early portion of my post.
Quote from clambill:
I'm wondering if anyone who follows the fundamentals can comment on how cheap we will be if we hit 500. The last decline we had lasted two years and this recession is worst than the last one. So, I'm wondering how cheap 500 would be.
standard and poors estimates the following:
Operating EPS (bottoms up)est approx $65 (these earnings are x writedowns)
As reported EPS (top down) est approx $32 (with writedowns)
this is the widest spread between the two because of the massive writedowns we have experienced. Normally, Operating EPS are used ..but i can't see how wall street will overlook as reported EPS ..
anyway ..if you believe these estimated earnings will be what is actually reported (which i don't) , you can take the mid range estimate which is $47 per share .. and slap a 10x 15x and 20x multiple ..
i would say fair value for the sp is no more than 10x EPS .. which would be 470 ..
the market is very cheap. the sp00z could surge to 1440 and the PE ratio would only be 22.
Don't focus on earnings. P/Es are useless in a harsh recession or depression with financial collapse, because earnings will obviously be at a trough or negative for many stocks in the index.
You should look at more robust valuation measures such as price to sales, price to book, market capitalization as a % of GDP, and dividend yields. Be aware of likely cuts/falls in those measures as well.
IMO stocks will need to go to pretty fat dividend yields before a bottom is put in. Work out the implied S&P price if dividends were to yield a conservative 6%, for example. And it's quite possible blue chip yields go to 10 or 12%, as they did in the UK in late 1974.
You should look at more robust valuation measures such as price to sales, price to book, market capitalization as a % of GDP, and dividend yields. Be aware of likely cuts/falls in those measures as well.
IMO stocks will need to go to pretty fat dividend yields before a bottom is put in. Work out the implied S&P price if dividends were to yield a conservative 6%, for example. And it's quite possible blue chip yields go to 10 or 12%, as they did in the UK in late 1974.